New Central Bank Governor Finds Israel’s Politics Hard to Avoid

Bank of Israel Governor Karnit Flug speaks during a news conference in Jerusalem last month.

Reuters

Bank of Israel Governor Karnit Flug gave her first press conference to foreign journalists since being appointed to the position late last year and almost immediately found herself navigating around sticky questions about politics rather than economics.

Asked whether the possibility of a cessation in peace negotiations with the Palestinians and potential boycotts would have an impact on Israel’s economy, the central bank chief acknowledged that Israel stands to get an upside boost in foreign direct investment if the sides were ever to reach a deal. But in the next breath, Ms. Flug sought to minimize the downside potential of a collapse.

“We should remember we have a lot of experience with geopolitical shocks and the Israeli economy has shown resilience to these shocks,’’ she said. “So I think it’s an attribute of the economy that it’s quite resilient to geopolitical developments.’’

Resilient, possibly, but not immune. In 2002, the Bank of Israel blamed the Palestinian uprising that broke out after failed peace talks in 2000 for the country’s longest recession ever and estimated lost growth of between 3 to 3.8 percent. At the time, the Bank of Israel blamed the campaign of militant bombings for the worst slide in private spending since 1984.

Later on in the press conference, Ms. Flug stayed mum when asked about government construction in the controversial West Bank settlements and whether she considers such locations to be the “high demand area’’ where she says Israel needs to build more homes in order to ease surging real estate prices in recent years. “I’m not… I don’t know,’’ she said. Ms. Flug was appointed by Prime Minister Benjamin Netanyahu and Mr. Lapid in October to fill the vacancy left by Stanley Fischer, who is now the deputy chairman of the Federal Reserve.

In her defense, Israeli central bank governors are expected stick to the economy and avoid wading into national security affairs. Central bank observers are watching to see how she does filling the outsized shoes of Mr. Fischer and how she handles Israel’s robust currency, the shekel.

Indeed, on economics Ms. Flug didn’t shy away from criticizing government policy: she has put the government on notice that it will need to cut its spending commitments over the next five years while increasing taxes.

And most recently, she has taken on Messrs. Netanyahu and Lapid over their controversial proposal to ease the pain of surging property prices by exempting some home buyers from paying value added taxes on purchases.

At the press conference, Ms. Flug criticized the VAT exemption idea as ill-conceived, saying that it would generate additional price surges and create a new hole of about $714 million in Israel’s budget.

“I’m afraid, it will basically not get the [desired] results,’’ she said.